6.5 Credit risks
Bad debt risks in reinsurance are of relevance to our company because the business that we accept is not always fully retained, but instead portions are retroceded as necessary. Our retrocession partners are therefore carefully selected in light of credit considerations. This is also true of our broker relationships, under which risks may occur inter alia through the loss of the premium paid by the cedant to the broker or through double payments of claims. The associated risks are therefore minimised with the aid of a number of mechanisms. For example, all broker relationships are reviewed once a year with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation.
Hannover Re counters the risk of default on reinsurance recoverables by carefully selecting its partners with the aid of an expertly staffed Security Committee. The Security Committee continuously monitors the credit status of retrocessionaires and approves measures where necessary to secure receivables. The Group Protections unit is responsible for the Hanover Re Group's ongoing cession management. This process is supported by our "Cession Limits" Web-based risk management application. This assists with the Group's cession management by specifying cession limits for the individual retrocessionaires participating in protection cover programmes and determining the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes account not only of the minimum ratings of the rating agencies Standard & Poor's (S&P) and A. M. Best but also internal and external (e.g. market information from brokers) expert assessments.
The key ratios for management of our bad debt risk are as follows:
- 95.5% of our retrocessionaires have an investment grade rating (AAA to BBB), and 95.3% thereof are rated "A" or better.
- Since 2004 we have reduced the level of recoverables by altogether 50.0%.
- 30.3% of our recoverables from reinsurance business are secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as reinsurer, meaning that in principle recoverables can potentially be set off against our own liabilities.
- In terms of the Hannover Re Group's major companies, EUR 290.3 million (10.4%) of our accounts receivable from reinsurance business totalling EUR 2,801.8 million were older than 90 days as at the balance sheet date.
- The average default rate over the past three years was 0.3%.
Retrocession, that is to say the passing on of portions of our assumed risks, gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i.e. the reinsurance recoverables on unpaid claims – amounted to EUR 2,079.2 million (EUR 2,471.6 million) as at the balance sheet date.
The following chart shows the development of reinsurance recoverables on unpaid claims:
Reinsurance recoverables as at the balance sheet date
The chart shows the high quality of security backing our reinsurance recoverables. It also provides insight into the ratings of our retrocessionaires.
The retention, i.e. the portion of assumed risks that we do not retrocede, developed as follows in recent years:
Excel download (19 KB)Retention as a percentage of gross written premium
| in % | 2008 | 2007 | 2006 | 20051) | 20041) |
|---|---|---|---|---|---|
| Hannover Re Group | 89.1 | 87.4 | 76.3 | 79.2 | 77.6 |
| Non-life reinsurance | 88.9 | 85.3 | 72.4 | 85.9 | 83.0 |
| Life and health reinsurance | 89.3 | 90.8 | 85.4 | 92.8 | 90.2 |
| 1) Figures for 2004 – 2005 before new segmentation | |||||
The ratios shown below constitute further key tools for the monitoring and management of the credit risks associated with our entire business operations.
Excel download (20 KB)Key ratios
| 2008 | 2007 | 2006 | 2005 | 2004 | |
|---|---|---|---|---|---|
| Solvency margin1) | 66.7% | 72.6% | 68.8% | 61.1% | 55.1% |
| Debt leverage2) | 41.3% | 35.0% | 39.1% | 45.8% | 36.5% |
| Interest coverage3) | 1.9x | 12.0x | 10.5x | 1.2x | 8.0x |
| Reserves/premium4) | 312.4% | 291.3% | 305.2% | 304.8% | 274.0% |
| Combined ratio (non-life reinsurance) | 95.4% | 99.7% | 100.8% | 112.8% | 97.2% |
| 1) (Shareholders' equity minority interests hybrid capital)/net written premium | |||||
| 2) Hybrid capital/(shareholders' equity minority interests) | |||||
| 3) EBIT/interest on hybrid capital | |||||
| 4) Net reserves/net premium earned (Group) | |||||
For further remarks on technical and other assets which are unadjusted but considered overdue as at the balance sheet date as well as on significant unscheduled depreciation taken in the year under review please see Section 7.2 "Technical assets and liabilities" and Section 7.12 "Other assets and liabilities".
Credit risks from investments may arise out of a failure to pay (interest and/or capital repayment) or change in the credit status (rating downgrade) of issuers of securities. We attach vital importance to credit assessment conducted on the basis of the quality criteria set out in the investment guidelines.
Excel download (20 KB)Rating structure of our fixed-income securities1)
| Government bonds | Securities issued by semi-governmental entities | Corporate bonds | Asset-backed securities | |||||
|---|---|---|---|---|---|---|---|---|
| in % | in EUR million | in % | in EUR million | in % | in EUR million | in % | in EUR million | |
| AAA | 91.0 | 5,105.8 | 59.9 | 2,763.8 | 5.1 | 239.4 | 78.6 | 2,367.7 |
| AA | 2.3 | 130.0 | 34.1 | 1,572.3 | 20.2 | 939.3 | 13.7 | 414.1 |
| A | 4.3 | 241.3 | 5.1 | 237.4 | 54.9 | 2,553.1 | 1.8 | 54.1 |
| BBB | 2.2 | 123.6 | 0.7 | 30.5 | 14.4 | 668.4 | 2.4 | 71.5 |
| < BBB | 0.2 | 12.3 | 0.2 | 10.2 | 5.4 | 252.5 | 3.5 | 106.1 |
| Total | 100.0 | 5.613.0 | 100.0 | 4,614.2 | 100.0 | 4,652.7 | 100.0 | 3,013.5 |
| 1) Securities held through investment funds are recognised pro rata with their corresponding individual ratings | ||||||||
On a fair value basis EUR 2,482.9 million of the corporate bonds held by our company were issued by entities in the financial sector. Of this amount, EUR 1,749.5 million was attributable to banks. The vast majority of these bank bonds (almost 90%) were rated "A" or better.
Against the backdrop of the US real estate crisis and credit crunch, it should be noted that our investment portfolio does not contain any directly written credit derivatives. We did not write any off-balance sheet risks through structured transactions with special purpose entities. Of our total portfolio of asset-backed securities, more than 88% were attributable to mortgage bonds, municipal bonds and collateralised debt obligations as at the balance sheet date, 5% were comprised of commercial mortgage-backed securities and 4% consisted of residential mortgage-backed securities.
The latter items, which also encompass lower-quality mortgage loans, had a fair value of altogether EUR 31.0 million as at the balance sheet date; the underlyings for these securities were in part subprime assets. The write-downs taken on this portfolio amounted to EUR 15.7 million. Similarly, the value adjustments prompted by insolvencies at financial institutions remained within comparatively modest bounds. The failures of Lehman Brothers, Washington Mutual and Bradford & Bingley caused write-downs of EUR 28.1 million. Of this amount, EUR 25.6 million was apportionable to fixed-income securities and EUR 2.5 million to equity and equity-related securities.
In addition, we would refer the reader to our comments in the risk report on risk-minimising measures taken as a consequence of the crisis on international financial markets.